Good day, ladies and gentlemen, and welcome to CA Technologies' Third Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to turn the conference over to Ms. Kelsey Doherty. Ma'am, you may begin.

Kelsey Doherty

Thank you and good afternoon, everyone. Welcome to CA Technologies' Third Quarter Fiscal 2012 Earnings Call. Joining me today are Bill McCracken, our Chief Executive Officer; and Rich Beckert, our Chief Financial Officer. As a reminder, this conference call is being broadcast on Tuesday, January 24, 2012, over the telephone and the Internet. The information shared in this call is effective as of today's date and will not be updated. All content is the property of CA Technologies and is protected by U.S. and international copyright law and may not be reproduced or transcribed in any way without the express written consent of CA Technologies. We consider your continued participation in this call as consent to our recording.

During this call, non-GAAP financial measures will be discussed. Reconciliations to the most directly comparable GAAP financial measures are included in the earnings release, which was filed on Form 8-K earlier today, as well as in our supplemental earnings materials, all of which are available on our website at ca.com/invest. Today's discussion will include forward-looking statements subject to risks and uncertainties and actual results could differ materially from these forward-looking statements. Please refer to our SEC filings for a detailed discussion of potential risks. So with that, let me turn the call over to Bill.

William E. McCracken

Thanks, Kelsey and good afternoon to everyone. Thank you for joining us. I hope you have had a chance to review our press releases announcing our third quarter fiscal 2012 earnings and our enhanced capital allocation program. I'll start this afternoon with a brief overview of our third quarter performance. I'll then talk to you about our capital allocation strategy, which we first discussed with you at Investor Day in July and then indicated in October that we would provide you an update this quarter. I will conclude with a review of our progress driving sales growth and margin expansion. Rich will then provide details on the quarter and guidance for the remainder of fiscal 2012. We'll then take your questions.

In the third quarter, we saw growth in revenue and EPS and operating margin expansion, even after adjusting for a single license payment we received. As noted in our release, the unsolicited early single payment from a software company relates to a license agreement we entered into in connection with a litigation settlement we first announced in February 2009. This payment was not included in annual guidance provided by the company in October because we expected it in fiscal years 2013 and 2014.

Headlines from the quarter, which reflect year-over-year growth rates include: revenue growth of 10% in constant currency and as reported. The license payment added about 3 points to this growth. Non-GAAP operating margin was 38%, including approximately 2 points from the license payment. Non-GAAP earnings per share growth was 28% in constant currency. The license payment added 10% to this growth. Cash flow from operations, including the license payment, declined 19% in constant currency and 20% as reported. As we had anticipated, cash flow for fiscal 2012 is weighted towards the fourth quarter and this afternoon, we confirmed our cash flow guidance for the year. Our current revenue backlog grew 2% in constant currency and 1% as reported.

While we had a good quarter on many measures and continued to make solid progress against our long-term goals, we know we are not done. We remain focused on executing our strategy and driving further operational improvements, including new product sales, execution in EMEA, greater sales productivity and continued work on our expense structure.

Now let me go to our enhanced capital allocation program, starting with some background. As you recall, in July, we said as part of our long-term guidance, that we expected to return 40% to 50% of our free cash flow to shareholders in the form of share repurchases and dividends. As I mentioned in October, management and the board were continuing to evaluate ways to optimize our balance sheet, while maintaining the financial flexibility we need to build our business and continue to improve our competitive positioning. We believe our enhanced capital allocation program announced this afternoon puts us on a path to achieving a balanced approach to return more cash to shareholders, while still enabling us to invest in our future. This is a logical extension of the strategic and operational priorities we outlined at Investor Day.

Fundamentally, the dividend increase and share repurchase authorization underscore the board's and management's confidence in the company's long-term business outlook and our ability to generate significant free cash flow on a consistent basis. It is our consistent free cash flow, driven by our current and projected operating performance, that allows us to fund this ongoing return of capital and at the same time, continue to invest in our future to further improve our strategic market position and deliver superior mainframe enterprise and cloud solutions and services to our customers.

Today, we are focused on 3 priorities to build long-term value for CA Technologies customers, employees and shareholders. First, to continue to execute our strategy and improve our operating performance. Second, to provide for a greater return of cash to shareholders through increased dividends and share repurchases. And third, to effectively use the balance sheet to return additional cash in the near term through an accelerated buyback.

In summary, we are targeting to return to shareholders approximately $2.5 billion through fiscal year 2014, or about 80% of our expected cumulative free cash flow over that period.

Key elements of the program include: One, an increase in the dividend from an annualized rate of $0.20 per share to $1 per share. That is a yield of approximately 4.5% based on yesterday's closing market price and currently puts our dividend yield at the top of comparable technology companies. The board and management view returning cash to shareholders through dividends as an important component of our overall approach to enhancing shareholder value.

Two, a new $1.5 billion share repurchase authorization through fiscal 2014, including an accelerated repurchase of approximately $500 million under an agreement to be executed in the fourth quarter of fiscal 2012. Including the accelerated share repurchase and shares repurchased year-to-date, we expect we will have spent approximately $1 billion to buy back shares during fiscal year 2012. The $1.5 billion authorization replaces the approximately $230 million remaining under our current authorization. We are confident we have the balance sheet capacity to get this done and the program is expected to be funded by available U.S. cash.

Three, our strategic plan anticipates that we will continue our investment in the business consistent with that of previous years, or approximately $1 billion annually. This includes acquisition activity in the range of $300 million to $500 million per year, on average, through fiscal 2014 and the approximately $600 million we invest on average each year in organic research and development.

So let me answer the critical question of how we intend to continue to improve execution against our strategic plan. As we've highlighted in this afternoon's capital allocation release, we remain comfortable with the long-term targets for the period ending March 31, 2015, that we provided at Investor Day in July. This includes an acceleration to mid-single digit constant currency organic revenue growth and an expansion of our non-GAAP operating margin by 100 basis points a year. Our expectation is that, over time, much of this operating margin expansion will come from improvements in execution in our Enterprise Solutions segment, driven by accelerating product sales and greater efficiency in our sales force. We intend to continue to drive more growth and more profit from each dollar we invest, and we will continue to systematically improve productivity and efficiency in our organization.

In our second quarter earnings call, we outlined 3 immediate growth initiatives: Expanding product penetration in new accounts and growth geographies; continuing to improve our results in EMEA; and driving consistent performance out of our acquisitions. In terms of product penetration, this past quarter, we focused on 3 main areas.

First, we continued our market segmentation initiative, which as a first step, includes the rebalancing of our sales force to align what has been a highly concentrated coverage model to new opportunities in approximately 1,000 large new enterprise accounts and approximately 7,000 accounts in the midmarket. Focus in these groups on sales of new products to new customers, our market segmentation effort is designed to drive product penetration in new accounts and accelerate performance of our acquisitions.

Second, we told you we expect to add an incremental 300 new quota-carrying sales reps globally by year end. 1/3 of these resources will be new to CA Technologies, while 2/3 reflect a reallocation of existing internal resources. All of this will be accomplished under our current expense profile. At this point, we are approximately halfway through this process and expect to be completed by the end of the fourth quarter.

Finally, we have continued to make significant investments in growth geographies. These are long-term investments in markets that are key to accelerating new product sales and our ongoing success in the years to come. This quarter, we had excellent results in Latin America, where we added more than 30 new enterprise customers to the region and expanded our footprint in more than 60 current customers. In Asia Pacific, we added more than 30 new logos to the region, including 15 for Nimsoft. Growth in new product sales more than doubled in China and grew more than 40% in Korea.

Next in EMEA. We believe the team we have in place is introducing the right discipline and incentive structure to keep both our renewals process and new business pipeline on track. Our plan is focused on improving sales execution and productivity, driving marketing and brand awareness and developing our people. While we do not want to get ahead of ourselves, we were pleased to see modest revenue growth in EMEA this quarter and wins with Volkswagen, SAP, Daimler and Crédit Agricole.

Lastly, with respect to acquisitions, we believe our strategy to aggressively capitalize on the evolution of virtualization management, cloud computing implementation and SaaS delivery of IT is working. We continue to focus on driving results from investments we have made, both through organic development and in companies such as Nimsoft, 3Tera AppLogic, ITKO and Arcot. Results achieved during the quarter give us confidence that our strategy to reach new customers and the midmarket is the right one. This quarter, Nimsoft added a record 100 new logos and in December, we received notification that Net One Systems formally selected Nimsoft to be their platform of choice for their future business services for their XOC managed operations center, one of the largest in Japan.

We closed a significant transaction with IGT, which selected AppLogic to continue innovating how casino games, systems and experiences are delivered with the IGT cloud.

ITKO delivered a record quarter, closed 5 deals over $1 million and saw their average transaction size significantly increase. Customers like DIRECTV and SoCal Edison report return on their investment in ITKO in terms of weeks and continued to expand their usage and licenses.

Finally, Arcot is protecting approximately 150 million identities worldwide. During the 2011 holiday shopping season, we averaged 1 million transactions per day for our e-commerce authentication on our SaaS platform.

In conclusion, the strategic initiatives and priorities we continue to pursue, in combination with our enhanced capital allocation program, reflect the ongoing commitment of the CA Technologies board, management and employees to deliver outstanding solutions and services to our customers and attractive, sustainable returns to CA shareholders.

Now I will turn the call over to Rich for a closer look at the third quarter.

Richard J. Beckert

Thank you, Bill. Turning to our third quarter results, please note that our growth rates are year-over-year unless otherwise indicated and all results are from continuing operations. As Bill mentioned, this quarter's result include the single license payment from the software company. This payment came in earlier than we had anticipated and was not included in the fiscal year 2012 guidance we provided in October.

The single license payment contributed the following to the quarter: revenue of $39 million reported in our Mainframe Solutions segment and in the Software, Fees and Other line on the P&L; GAAP and non-GAAP operating income of $36 million; GAAP and non-GAAP earnings per share of $0.05; and cash flow of $39 million.

Total revenue for the quarter was $1.3 billion and grew 10% in constant currency and as reported. 8 points of this growth was organic, while 2 points of this growth came from acquisitions. This quarter, we saw a $20 million increase in perpetual sales associated with Enterprise Solution products, including $10 million of products that were newly eligible for upfront recognition during the quarter.

From a segment perspective, Mainframe Solution revenue was $682 million, up 9% in constant currency and as reported. The single license payment contributed 6 points of growth in constant currency and as reported to Mainframe Solutions.

Our Enterprise Solutions revenue was $478 million, up 11% in constant currency and 12% as reported. Services revenue was $103 million, up 16% in constant currency and 17% as reported.

Underlying our results for the quarter, total new capacity and new product sales were up low-single digits. In Mainframe Solutions, new product sales for the quarter grew, both with and without single license payment. Capacity sales were down more than 20%. Quarter-to-quarter capacity will fluctuate, driven by the nature of the customers in our underlying renewal portfolio. Year-to-date, we are encouraged by the capacity trends which are up and believe that IBM Mainframe is bringing increased attention to the platform and over time, should serve as a slow, steady tailwind to CA Technologies.

Enterprise Solutions' new product sales were down approximately 5%. We saw growth in Virtualization and Automation and Identity and Access Management. This was offset by Service Portfolio Management and Service Assurance. Underneath these Service Assurance results, we saw growth in Application Performance Management that was offset by infrastructure monitoring. Finally, new service engagements were down slightly year-over-year.

Our renewal yield was just below 90%. We closed one transaction, a merger, that negatively skewed the results during the quarter. Excluding this transaction, the renewal yield would have been in the mid-90s. We continue to expect the 2012 renewal portfolio to be down approximately 15% year-over-year. For modeling purposes, please note that fourth quarter 2012 renewals face a difficult year-over-year comparison. This is due to a more than $500 million system integrator license agreement that was signed last year in our fiscal fourth quarter.

Looking at revenue backlog. Current revenue backlog was $3.6 billion, up 2% in constant currency and 1% as reported. Total revenue backlog was $8.1 billion, up 2% in constant currency and as reported.

From a non-GAAP perspective, non-GAAP operating income before interest and tax was $475 million, up 21% in constant currency and 23% as reported. For the quarter, our non-GAAP operating margin was 38%. Operating margins for Mainframe Solutions was 59%. Operating margins for Enterprise Solutions was 12%. This includes 4 points of continued investment in this segment. Finally, operating margin for Services was 11%. Non-GAAP diluted earnings per share was $0.65, up 28% in constant currency and 30% as reported, including a year-over-year $0.01 tailwind from currency. This quarter, EPS benefited from the previously mentioned license payment, operational improvements and our stock repurchase program.

Our effective non-GAAP tax rate for the third quarter of 2012 was 31.5%. Cash flow from operations in the quarter was $396 million, down 19% in constant currency and 20% as reported. Single installment payments were $107 million in the third quarter compared to $152 million in the previous period. Total billings backlog of $5 billion was up 7% in constant currency and 6% as reported. DSOs were essentially flat year-over-year.

Moving to third quarter GAAP results, third quarter operating margin before interest and taxes was 33%. GAAP operating income was $413 million, up 22% in constant currency and 24% as reported. And GAAP diluted earnings per share was $0.54, up 39% in constant currency and 42% as reported. Our effective GAAP tax rate for the third quarter was 34.9%.

Now moving to the balance sheet. We ended the quarter with approximately $1.1 billion in net cash. Between October 1 and December 31, we purchased approximately 9.6 million shares of stock for a total of approximately $200 million.

Now let me turn to fiscal 2012 guidance. As has been our practice, guidance is based on December 31 exchange rates. This includes a partial hedge of operating income and updates our expectations for share count. Guidance is the following: total revenue growth is now expected to be 6% in constant currency, at the high end of our previous range of 5% to 6%. This translates to reported revenue of $4.8 billion; non-GAAP diluted earnings per share growth in constant currency is now expected to be in the range of 11% to 13%, an increase from our previous range of 7% to 10%. This translates to reported non-GAAP diluted earnings per share of $2.21 to $2.25. GAAP diluted earnings per share growth in constant currency is now expected to be in the range of 11% to 13%, an increase from our previous range of 6% to 9%. This translates to reported GAAP diluted earnings per share of $1.86 to $1.90.

We continue to expect that cash flow from operations will grow at 3% to 5% in constant currency. This translates to reported cash flow from operations of $1.44 billion to $1.47 billion. Underlying this guidance, we expect our GAAP and non-GAAP tax rate to be 31% to 32% in this fiscal year. At the end of the year, we expect approximately 463 million shares outstanding and a weighted average diluted share count of approximately 486 million shares. This share count reflects the $500 million ASR under an agreement we expect to execute in the company's fourth quarter. We expect our non-GAAP operating margin to be a strong 34% for fiscal year 2012. And now, I will turn the call back over to Bill.

William E. McCracken

Thanks, Rich. I'd like to conclude by saying that our third quarter performance and positive operating momentum reinforce our belief that we have the right strategic plan in place. As I have said, we remain focused on execution and feel strongly that the initiatives we continue to pursue allow us to invest in our company's future, and at the same time, reward our shareholders.

And with that, Kelsey, let me turn it back to you.

Kelsey Doherty

Thank you, Bill. As the operator is polling for questions, I'd like to remind you on Tuesday, February 7 -- the Goldman Sachs technology conference in San Francisco on Wednesday, February 15. The Morgan Stanley 2012 Technology, Media & Telecom Conference in San Francisco on Tuesday, February 28, and the Raymond James Institutional Investor Conference in Orlando, Florida on Monday, March 5. In the interest of time, we ask you to please limit yourself to 2 questions. Operator, please open the call for questions.

Two quick questions on my end. Rich, can you guys provide us with kind of slightly more quantitative data on Europe. I know, Bill, you indicated some modest growth, but maybe a little bit more color on that, that would be helpful.

Richard J. Beckert

So sure. So, this quarter, what we saw coming out of Europe for the first time, 2 things. One, we saw them hold their forecast, which was great and then by the end of the quarter, it actually grew. So that was some positive momentum. We're not getting ahead of ourselves, but in the right direction. More important than that though, we saw them able to sell outside of their renewal cycle, which as you know, is low this year especially in Europe, but for all of CA, allowing them to have their best upfront revenue since we've been starting this program on the distributed side. It has allowed them to grow their revenue year-over-year and it demonstrated their ability to sell outside the renewal cycle. That help?

Shaul Eyal - Oppenheimer & Co. Inc., Research Division

Yes, absolutely, absolutely. Another question then on the cash flow, kind of, a little bit kind of on the weaker side as to how it relates to consensus numbers. Is it just a matter of collections? Is it timing? Is it kind of just being back-end loaded?

Richard J. Beckert

It's a great question. It's preliminary timing. We're very confident with our full year guidance. If you look at it on a year-to-date, CFFO is only down $14 million or 2%. Billings year-to-date is actually up $177 million or 6%. Customer collections is up $117 million or 4% and billings backlog is up 11%. So we can see a clear roadmap to how we're going to get to our 3% to 5% guidance.

Operator

Our next question comes from Gregg Moskowitz from Cowen.

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Congratulations on the capital allocation plan. It's a pretty impressive commitment, to say the least. I just had a clarification and then a follow-up. So Rich, it seems as though, as you said, 80% of your free cash flow through fiscal '14 is expected to go to buybacks and dividends and an additional $600 million to $800 million in M&A. I believe if I'm not mistaken, that would be roughly equal to or perhaps a bit above the $3 billion or so in the future cash flow generation over this period. So I guess first of all, I just wanted to see if that was correct.

Richard J. Beckert

No. We said our acquisitions will be in the $300 million to $500 million range over time.

Gregg Moskowitz - Cowen and Company, LLC, Research Division

And I'm sorry, was the $300 million to $500 million, is that per annum or is that between now and fiscal '14?

Richard J. Beckert

That would be an average over that timeframe, so in any one year we can do $300 million to $500 million. So averaging that.

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Okay, right. And I was essentially just kind of more or less doubling that in terms of kind of starting with $600 million in M&A. So I guess my question is, in terms of the future cash flow generation between now and fiscal '14, is essentially all of it kind of coming down to buybacks, dividends and M&A? Or is there another piece that I'm missing here?

Richard J. Beckert

No. We are looking at buybacks, the $1 dividend and our M&A, and we think through our continued operations and efficiency, we'll be able to easily do that. We have source and uses for the cash outside of the Americas and we're confident that we can do all our capital allocation with U.S. dollars.

Gregg Moskowitz - Cowen and Company, LLC, Research Division

Okay, great. And then in terms of my follow-up, Rich, so I guess a multipart question, if I could. How much cash, if you don't mind sharing with us, how much cash is currently onshore at CA? Secondly, if you complete this plan, how much will remain onshore by the end of fiscal '14 according to your projections? And then third, does this plan contemplate any issuance of debt or no?

Richard J. Beckert

So I'll answer 2 of those 3 for you. I will tell you that we're at 36% of our free cash flows, our cash is here in the U.S. And we don't plan on having to issue any kind of debt in order to do this capital allocation plan. But I don't plan on doing a forecast by geo going out over time.

Operator

Our next question comes from Aaron Schwartz from Jefferies.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

You talked a little bit about some of the, or actually even showed some numbers in terms of the upfront licensees in the quarter. Is there any change in terms of what you're bundling in with ELAs? And I don't know if that's related to your focus on new customer growth, but I would think that those would tend to be maybe one product sales versus bundled sales. I just was wondering if you could walk through that dynamic.

Richard J. Beckert

Great, that's a great question. From an -- what we are really seeing in the upfront revenue, we had announced some new products, it's actually refreshed products at CA World. We also had our products because right now, where we are in the renewal cycle as I talked about earlier in Europe, when the distributed products that have sold outside of renewal without mainframe, they qualify for upfront revenue. And so you see a little higher percentage of that happening because of the lower weighting, if you will, of transactions happening outside of the renewal. Remember, we also have ITKO, one of our new acquisitions, had a very strong quarter, that's all upfront revenue. So we were pretty happy with that.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Okay, thank you, that's helpful. And then, I guess maybe a follow-on question to what Gregg had asked, but obviously you laid out quite a bit of capital commitment here in terms of the cash allocation. Is there any way you can sort of prioritize the M&A side versus what you're committing to shareholders? And then on that front, I mean, does this at all--your intention to go from 40% to 50%, now up to 80% of free cash flow to shareholders, does that change your view on hiring, on retention? Anything operationally that you would have to do differently?

Richard J. Beckert

No. The only thing that you will see and we're already anticipating doing this as part of this capital allocation is you'll see us leverage our overseas operations more. So some globalization will occur. Where we actually do our M&A acquisitions, some of those will actually happen outside of North America, so some of that cash will be non-U.S. cash. So it's sort of right in line -- it is right in line with where we want it to go.

Aaron Schwartz - Jefferies & Company, Inc., Research Division

Okay. And a last question for me, if I could, but is there any intention to repatriate some of the overseas cash and pay the tax on that?

Richard J. Beckert

No.

Operator

Our next question comes from John DiFucci from JPMorgan.

John S. DiFucci - JP Morgan Chase & Co, Research Division

My congrats too here, I guess not just for me, but from the market that really likes what you're doing and doing the right thing with the capital structure here, but I'll let other ask questions on that. I also know, Rich and Bill and team, that you're totally focused on the business operations, and I don't necessarily see this as a signal, and you're talking about how you're going to continue to grow. And that's good to hear. And you can do both by returning cash and growing here. But when I look at the results for this quarter, which looked decent, but when I adjust for the $39 million single license payment, foreign exchange and if I adjust for the EDS revenue in the quarter or the large service provider in the quarter, and I realize it's real revenue, but at the same time it's not -- as far as a run rate, it's about the same business run rate as it was prior to the renewal. When I make those adjustments, I come up with revenue growth of about 2% on an organic constant-currency basis and bookings, and I realize, Rich, you really shouldn't be looking at it and you I think drove this home. And we understand you can't look at it, the bookings just because of timing. But it does, the bookings would have declined. So I guess looking at the 2% growth...

Richard J. Beckert

Can I just jump in for a second. It's about 2% for the system integrator. About 3% for that single license, so to your point that's -- you could argue 5 points. That'll be 3% that's organic and 2% that's acquisitive.

John S. DiFucci - JP Morgan Chase & Co, Research Division

Yes, but it's actually 3.4% and it's 2.2% and when you round them all up, they all add up to about 8%, it's like 7.7%.

Richard J. Beckert

John, I'm telling you, its 8.2%. So -- but keep going.

John S. DiFucci - JP Morgan Chase & Co, Research Division

Okay. So if it's 8.2%. I guess my question is, this 2% to 3%, is this sort of what we should be expecting or should we be expecting more than this as far as your -- we understand you're going to be buying some companies and some exciting technologies. But so far, that has -- that's still in progress. Should we be seeing more of this? And I guess how are we going to see it? Are we going to see even maybe perhaps more product out of CA that's not just through acquisition? Are there changes being made as Peter's come on board, as far as more organic product development even or something along those lines?

William E. McCracken

John, there's a couple of things that we would have mentioned here as we look forward. The acquisitions we've been making over the last 2 years, many of them now have moved into the organic area and as we've added additional capability to those, those are supporting our organic growth as we go forward and that'll continue into next year. When you look at the segmentation that we talked about in the last quarter, with the 300 additional sales reps we're moving out and we're moving into the segmentation area, that growth, new products and new accounts, will add to the organic growth as we go forward. And I think one of the probably key points that's worth looking at in the quarter is that you may recall a year ago when Nimsoft was reporting, we talked about 20 or 30 new accounts. We had over 200 new logos in the quarter. And so, with Nimsoft and with Latin America coming on very strong, now starting to get growth in the Asia countries and a return a bit from EMEA, we're starting to see the organic growth coming out of what we had previously done from the new products and acquisitions, as well as from new segmentation pieces. So as we look forward on the base business, we see organic growth being the way we move next year.

John S. DiFucci - JP Morgan Chase & Co, Research Division

Okay, thanks, Bill. And if I could, just to follow-up from Aaron's question for I think, Rich. Rich, we saw a sequential decline in subscription revenue this quarter, which is sort of odd to see given your model. This was more than offset by this -- a big jump in the Software, Fees and Other, even if you back out that single license payment. So if you could just sort of explain what was -- what's going on there.

Richard J. Beckert

Right. So what you did see, and it was reflected in my discussion on Europe as an example. If you were to combine the subscription bookings and the SFO bookings, you'd see we're closer, we're up single digit, John. And really, outside of the renewal, when we're doing a lot of our distributed transactions, they're going to be taken as SFO, which then does put pressure on the revenue backlog in the subscription line.

Operator

And our next question comes from Walter Pritchard from Citigroup.

Walter H. Pritchard - Citigroup Inc, Research Division

Just a question on the bookings, and I know not a focus here in the quarter necessarily, but you have had, I think, about 11 out of 15 quarters on an annualized basis over the last 3 years or so, 4 years, have declining bookings. I'm trying to get a sense of when we should start to see the bookings turn around? It seems like you can't grow revenue forever without annualized bookings growing and it seems like when you see that here shortly, so I just wanted to get a sense of how far we need to look out to see bookings growth resume?

Richard J. Beckert

Right. So if you recall just for clarity, we'll have -- this fourth quarter, we'll have a very difficult compare with the $500 million transaction we did last year. So we'll be down for the year 15%. Next year is the end of our trough for the renewal cycle, and we start a very strong '14 and '15 thereafter. So to the degree that the renewals have, and they do weigh heavily on the total bookings because they tend to be longer in duration, it will put pressure on that. To the degree we continue to sell outside of the renewal cycle, which allows us to grow footprint, products like Nimsoft, which back to John's question, by this time next year, will generate about 1 point of growth, we really start to have other engines that are starting to kick in. ITKO will have another strong year. Again, that's outside of the renewal cycle. So I think you're right. It'll continue to be on the lower side. In May, we'll give you guys more guidance on FY '13.

Walter H. Pritchard - Citigroup Inc, Research Division

Okay. And then just on a -- some questions, just a couple of specifics on the capital allocation. You talked about $1 dividend. Is that--can you talk about the path to get there? I assume that's not $1 for next year. Is that $1 exiting 2014 or any color on that? And then also, a share count around with the ASR next quarter. I think that the share count will come down.

William E. McCracken

So if that starts this quarter. So on February 14, I believe, if you're a holder, then you'll get $0.25 per share. And for modeling purposes for everyone on the line, as we said on the call, you should assume 486 million shares on average to do your model for EPS.

Operator

Our next question comes from Kirk Materne from Evercore Partners.

Stewart Materne - Evercore Partners Inc., Research Division

Maybe just a couple of clarifications. I guess, Rich, first, going forward, can you give us any idea of just sort of what your assumption is or I guess what the historical split's been on operating cash flow between U.S. and international, just so I can get a sense of sort of what your -- you guys have said you can pay with it all--pay for all of this with your U.S. cash flow. I'm just trying to get a sense of how that's broken out. I know you've given us what the balance sheet split is. I'm just trying to get a sense on, I guess historically what it's been if you don't want to give us a forward-looking number.

Richard J. Beckert

Roughly a 40%, 60% split. It depends on the particular time of year, it depends on the size of certain transactions that might come in that might move it a little bit. Even though we've already accumulated through year-to-date $550 million worth of shares, we're still at 36% of our U.S. to non-U.S. at 64%. So it's pretty healthy, and we feel confident that we can continue in that range going forward.

Stewart Materne - Evercore Partners Inc., Research Division

I'm sorry, it's 40% comes from the U.S. and 60% is international in your operating cash flow?

Richard J. Beckert

And right now, it's 36%. No, I'm talking about the cash on the balance sheet to be very clear.

Stewart Materne - Evercore Partners Inc., Research Division

Okay. I guess I'm just trying to get a sense on when you guys are planning this out, you obviously had to make an assumption on what the U.S. international cash flow is going to look like. And I know you don't want to get into guidance but I guess just historically, when you bring in $1 of cash historically, I guess, how is that broken out? Is it 60%, 70% U.S. and 40 -- I'm just trying to get a sense on -- just so I can do the math to make sure the numbers and what you've committed to make sense.

Richard J. Beckert

It's approximately 60% in the U.S. free cash flow. It will depend by quarter, but it's approximately 60%.

Stewart Materne - Evercore Partners Inc., Research Division

Okay, that's helpful, thanks. And then just lastly on -- you guys have obviously recommitted to growing operating margins by 100% per year or 100 basis points per year. I guess, does that also take into account any kind of M&A you'd be doing? So if you do go through the $300 million to $500 million you're talking about in M&A, would that be inclusive of that? Or would that potentially have to be adjusted depending on the deal?

Richard J. Beckert

Any more tuck-ins would be included in there. Any upsize would not be included in there.

Stewart Materne - Evercore Partners Inc., Research Division

Okay. Can you give me an idea what you're thinking about size? Over $100 million?

Richard J. Beckert

Well, it'll depend on the year I think, going forward. So as we do make those, we will make corrections, we'll make sure that we let everyone know once that guidance changes.

Operator

And our next question comes from Michael Turits from Raymond James.

Michael Turits - Raymond James & Associates, Inc., Research Division

Two sets of questions. First is a clarification on Kirk's question about the margin expansion. So if you do the $300 million to $500 million in a given year, should we anticipate you get a point of margin expansion or you get less?

Richard J. Beckert

As I said, it will depend on what the acquisition is, Mike, and it will depend on the size of it, when it happens in the year. So right now, the guidance that we're giving is currently without any impact. In other words, if we do an acquisition and it impacts us, then we will have to modify. So it's as if there's no impact to that. We'll let you know if it changes.

William E. McCracken

What you should expect is that we are driving operations cost and expense to improve 100 basis points on margin every year. If there's a transaction that comes into it that would change it in any way, we'll tell you that, but the operational improvements we'd make on cost and expense are at the rate that we have told you in the past and in our guidance.

Michael Turits - Raymond James & Associates, Inc., Research Division

Okay. So I'll assume the baseline assumption for a point of margin expansion is 0 or close to 0 in acquisitions.

William E. McCracken

That is correct.

Michael Turits - Raymond James & Associates, Inc., Research Division

And then a follow-up, obviously was a solid quarter in a lot of ways but 2 things that jumped out at me. One is that the growth rate for the current one-year revenue backlog, that growth rate decelerated again. I think down about 2 points, 2% and that's been going down for a little while. And then the other thing that jumped out that was of some concern to me was again, I think in Enterprise, you guys declined in new product sales. So what is really going on in terms of the fundamentals of selling new enterprise software licenses? Is it getting to be overall, a tougher thing to do? And do those numbers reflect that? And when can those start reversing?

Richard J. Beckert

Okay. So the first part of your question on the revenue backlog, it did slow down, although it did grow sequentially 1%. And that, there's a weighting on the lower renewal portfolio and a higher number of deals that are done outside the renewal cycle would drive that. And therefore, you move more of your products to the perpetual license that's accounted for in the SFO line. From a new sales standpoint, I think the way we would tell you is, we were pleased with our Virtualization and Automation, Identity and Access Management. Service Assurance was mixed, where we had good growth in Application Performance Management and that was offset a bit by Infrastructure Monitoring. And we had a decline in Service Portfolio Management. So it was mixed. But in general, we had some very good bright spots. We had very good mainframe new license sales as well, excluding even that single license payment.

William E. McCracken

And what we do see is that the SFO line does go up, as Rich explained, and that has a lot to do with what we talked about last quarter with respect to market segmentation. We're going and selling new products in new accounts. And a lot of those flow in on the upfronts. And as an example, ITKO, last quarter had $1 million. This year -- this quarter $20 million, so we're seeing significant growth in the upfronts with respect to the new products and new accounts.

A couple of questions. First are, what are the levers for the margin expansion of 100 basis points annually? Are these savings spread across R&D, sales and marketing and G&A or is it from one of the specific areas? And then the second is, you lowered guidance last quarter and now you're moving it to the high end of the range. What's changed to give you more confidence?

Richard J. Beckert

Okay. So I'll answer the second one first. The single license payment added a little under 1 point of revenue growth, which allowed us to move ourselves up to the high end of guidance. That will probably be a strong 6%, just so people understand where that sits. We thought that it was prudent to keep it within the top end of the range due to the macro environment. We don't want to get ahead of ourselves as Bill had said earlier. On your first part of the question, most of the improvements we'll see next year, we continue to make improvements on G&A. It will all be predominantly in the Enterprise Solutions segment, as we talked about back in July, and you see us continuing to demonstrate efficiencies that we're able to work through the business in all elements. So sales will become more efficient. We talked about the 300 people that by Q1 will have moved out of overlay positions into quota carrying. So that drives your sales E/R. Our development E/R, we think, is actually set fairly well. So we're not looking to do much to the sales here. We would always continue to make improvements to the G&A line. The G&A line of course will benefit all segments.

Operator

Our next question comes from Matt Hedberg, RBC Capital Markets.

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

Most of my questions have been asked at this point, but you just made a point about indicating that within Europe, you've seen a nice improvement in interquarter sales beyond the renewal period, which has been sort of something you guys have been working on for a while. I guess, can you kind of address that beyond Europe? In North America, APAC and kind of give us a sense for maybe how some of these newer SaaS products are helping in some of those geos as well?

William E. McCracken

We're seeing that now happening. We had talked about it before happening in North America and I think as we work on the growth geographies, as we talked before, Latin America for this quarter was a very significant expansion. In fact, they were up around 60% year-over-year and a lot of that comes out of those selling outside of the ELA cycle. Same thing was proven in Asia as well, too. So that has been a focus of ours and it is a big piece of what we've been talking about here with a lot of these questions, as to the revenue flow that we get out of new products in new accounts and the upfront license as it is booked from that perspective. So that is a big part of what our strategy was and how it fills in from revenue point of view on a quarter-to-quarter basis.

Matthew Hedberg - RBC Capital Markets, LLC, Research Division

And then, one last question. You guys are making some nice progress on your quota-bearing sales rep hiring here. I guess I'm wondering how has attrition been? And I guess in terms of productivity, what more can we expect from productivity as we enter your fiscal fourth quarter?

William E. McCracken

We've not seen any significant change in the attrition at all. And as we said, about 100 of the 300 have come from outside. That was the plan as we talked about last quarter. We've got about 150 of those folks in place and we'll finish that this quarter. But we haven't seen a significant change with respect to attrition in any of our geographies.

Richard J. Beckert

And on your question on sales productivity, we continue, as we had said back in July, that over the next few years, we'll be taking 1 point or 2 out of that total sales to revenue ratio.

Operator

And our next question comes from Philip Winslow from Crédit Suisse.

Philip Winslow - Crédit Suisse AG, Research Division

Most of my questions have been answered, but just wanted to go back to the new product sales commentary from earlier. You guys talked about how Enterprise Solutions' new product sales were down approximately 5%. Now, that's better than last quarter when they were down 20%. But just that line in particular, you guys put a lot of focus in terms of incremental growth, I'm hearing. Even it's kind of excluding renewals, when do you think we're going to start to see that turnaround and what's really going to be the driver for that?

William E. McCracken

The key thing on that is, when you look back 2 years ago. One of the things we talked about when we bought Nimsoft was that we bought 2 things: we bought technology but we bought a delivery channel and primarily the MSPs. New products and new accounts midmarket is growing there rapidly. In fact, Nimsoft is up 70% the last 2 years in this growth piece. That is where the market seems to be going as well, too. In fact, I think you've seen it in the industry, the IM piece is actually cutting back a little bit in its historical way that it flowed and what we're finding is that we're bringing the Nimsoft piece up as the PNCV on the other piece goes down and that is, for us, been one of the strength pieces as to the way it's balanced it versus the way the rest of the market for some of our competitors have worked. The second thing is and probably very importantly, the acquisition of ITKO adds significantly to that. And as we've mentioned, that was a major growth not only in the revenue shift this quarter but also in the transaction size because it's about triple the size it was a quarter ago. Does that help?

Kelsey Doherty

I think we've lost them unfortunately. I think we need to move to the next question please.

Operator

Our next question comes from Scott Zeller from Needham & Company.

Scott Zeller - Needham & Company, LLC, Research Division

The first question is around the sales changes. You mentioned in the prepared remarks the 1,000 high-end accounts and then the 7,000 below that. Is that -- I guess I'd call it a reassignment or redrawing of accounts? Is that complete, the reassignment?

William E. McCracken

The segmentation of the pieces that we talked about last quarter, we are halfway through on the total, which is 150 of the 300. As far as the segmentation is concerned, yes, that work is done and the assignment of those folks to that is completed as well.

Scott Zeller - Needham & Company, LLC, Research Division

Okay. And then on the Enterprise Solutions group, the Virtualization-related products, could you talk about bookings trends in that group of products, please?

Richard J. Beckert

Sure. We're pretty pleased with the performance of the products in Virtualization. I think what you'll see is we had 2 large transactions inside of that space that really benefited us. And again, as we talked about ITKO earlier, it really had an outstanding quarter, right on target with what we had anticipated internally for our acquisition case.

Operator

Our final question comes from Kevin Buttigieg from Collins Stewart.

Kevin M. Buttigieg - Collins Stewart LLC, Research Division

Just 2 quick questions on capital allocation. First of all, I was just wondering if you could talk a little bit about your philosophy between the return of shareholder funds in the form of dividends versus buybacks? Obviously, you've been much more skewed towards buybacks historically, and this is a very significant increase in the dividend here today. And then just secondly, I wanted to ask, I understand, Rich, what you're saying about there's no need to issue debt here, but I guess my question would be why not? If you look a few years ago, CA had $1 billion more in net cash and $1 billion more in debt. So clearly, there's the flexibility on the balance sheet, and it would give you more flexibility today, including the possibility of an even greater return of cash to shareholders, particularly when the cost of debt is so low. So just wondering if you're targeting a specific debt rating there or really what your thought process is on those 2 issues?

Richard J. Beckert

Sure. So the first piece, the increase today in the amounts really underscores our confidence in our ability to do -- have a very strong long-term business outlook and our ability to generate cash over the long term, which is going to be given out via dividends. And we think by having the dividends, it really rewards our shareholders and the partnership we have with them over time. On your second question on why we wouldn't leverage up the balance sheet, that tends to be more of a shorter-term view. If we were to do something like that, it would really be more for a very large acquisition or something along those lines which we do not plan on doing at this time. We do not see the advantage of taking on incremental debt, and we are happy with the credit ratings that we currently have.

William E. McCracken

And on the dividend piece, I think it represents our confidence, both the board and management's confidence, on our operational performance going forward when we put it in the form of a dividend to reward our shareholders as well.

Kelsey Doherty

Thanks, Kevin.

William E. McCracken

So let me just wrap up. I guess I would make 3 points as we wrap up. First is we're going to continue to press, as we have been, on executing the strategy and improving our operational performances. On the second point, as we have mentioned today, we want to return cash to our shareholders and reward them because we believe we can both invest in our future, as well as return cash to our shareholders. And then finally, we want to make sure that we keep our balance sheet as an efficient balance sheet in the things we do going forward. So we were pleased with this quarter, and we believe that going forward, we have an opportunity to both invest in the future and also return cash for our shareholders. Thanks for hooking up with us.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This concludes our program for today. You may all disconnect and have a wonderful day.

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